1.2.5 Elasticity of Supply Flashcards
What is Price elasticity of supply (PES)?
The responsiveness of supply to a change in price of the good
What is the formula for Price elasticity of supply (PES)?
% Change in quantity supplied / % Change in Price
Unitary elastic PES is where…
PES=1
Relatively elastic PES is where…
PES>1
Relatively inelastic PES is where
PES<1
Perfectly elastic PES is where….
PES=infinity
Perfectly inelastic PES is where…
PES=0
Which elasticity is S1?
Unitary elastic supply curve
Which elasticity is S2?
Relatively elastic supply curve
Which elasticity is S3?
Relatively inelastic supply
What factors effect PES?
- Time
- Stocks
- Working bellow full capacity
- Availability of factors of production
- Ease of entry into the market
- Availability of substitutes
Explain how time effects PES
- Will have an impact on the amount of a good that can be supplied at any price.
- In the immediate term, no matter how high the price is, a supplier can only sell the amount of product they have so supply is perfectly inelastic.
- In economics, the short term is the period of time when at least one factor of production is fixed and the long term is when all factors of production are variable.
- In the short term, they could sell more products but will still be restricted by the factors of production, meaning it will still be relatively inelastic.
- In the long term, they can increase production and all factors are variable and therefore the supply curve will be elastic.
- The longer the period of time the supplier has to make a change and increase production, the more elastic the curve will be.
Explain how stocks affects PES
- If a business has a stockpile of goods, when the price goes up, they will
simply decide to use up some or all of their stockpiles and therefore supply will be more elastic.
Explain how working below full capacity affects PES
If a business is working below full capacity (e.g. they are producing 50 goods but could produce 100) and there is an increase in price, they can easily respond by producing to their full capacity so the supply curve will be more elastic
Explain how availability of factors of production affects PES
For example, labour may need particular skills or training so cannot be instantly increased.
- If wages of a doctor rise by a large amount, it would still take years before there would be an increase in the number of doctors so it is inelastic.